A Post-Election Bet on Growth

With the election out of the way, the markets worry about Europe, Chinese elections, and the US fiscal cliff...but in the end, the underlying bet is on growth, notes Stephen Leeb of Leeb Income Performance.

The market’s initial reaction to President Obama’s reelection has been to shun everything related to growth, as evidenced by the large declines in oil, copper, and other basic commodities, as well as stocks.

The market has put its chips instead on the only path to stimulating growth that it sees as happening. It’s betting on further easing by central banks, especially in the United States and Europe, and even in Japan.

The evidence, of course, comes from the dramatic outperformance of gold. What strikes us as most meaningful isn’t just that gold has held last week's large advance—it’s that, unlike in previous times when gold has been strong, this time around gold stocks have dramatically outperformed other stocks.

And while it’s far too soon to declare a new leg for the bull market in gold, this kind of action—in which gold and gold stocks shine together, in contrast to the action in other commodities and especially apart from stocks—is what you’d expect in a bull market for gold. Thus, one immediate recommendation in the wake of Obama’s victory is to continue to have at least part of your portfolio invested in gold and gold stocks.

It’s far too soon to make any really heroic long-term projections. We understand the flight to gold, which is a strong bet on further monetary easing. We understand it in the context of a market betting on governments being unable to create the sort of fiscal environment—adequate incentives for infrastructure, regulations that encourage growth, appropriate tax policies, cuts in spending—that do not undermine economic growth.

Governments, in other words, have shown themselves abysmally incapable of acting with a long-term point of view. However you voted, you have to interpret the Obama victory at least for now as implying there will be no real change in the calculus affecting financial and physical assets.

The US election, as important as it may seem, is just one of many transitional events ahead affecting investors. Next up is a series of votes on whether the Greeks will continue to accept extreme austerity or possibly be forced to default and potentially leave the Eurozone.

Such a possibility gives rise to uncertainties, especially given recent news that problems at the periphery of the Eurozone, namely Greece, have started infecting the center, with even Germany now appearing to be either on the cusp of or already in an actual recession. Clearly, no one in their right mind can see this as a triumph of how politics deals with economic crises.

In Europe, as in the US, the perceptions are strong and unequivocal that the only means of rescue lies with the central bank and with money printing. And for good measure, there’s Japan, which is also in the throes of a crisis...and for the first time in a long time has resorted to very aggressive monetary stimulation in the wake of—you guessed it—government paralysis as to how to handle the country’s massive government debt load.

For more than a generation, the Japanese have not had to worry too much about debt because the country’s debt was all held by Japanese citizens, either directly or indirectly. This, of course, explains the paradox of why Japan’s currency, despite this massive government debt, has always been viewed as a safe harbor.

But Japan’s aging population is making it ever harder to count on issuing more debt to a citizenry already heavily invested in government debt. If Japan were ever forced to sell debt to the rest of the world, you’ll have the potential for a catastrophe. So it appears the only sure buyer for Japanese debt is Japan’s central bank—meaning more moneyprinting.

OK, those are our gloom-and-doom thoughts, along with a way to protect yourself—i.e., gold. But we also think this remains a world in which there are more positive scenarios.

There is a route to growth. The Chinese, after all, have discovered it. It’s called massively building out infrastructure in preparation for new energies and other industries.

There’s absolutely no reason why under the right leadership or right thinking the US, and indeed Japan as well, could not lead the way in such an endeavor. The tragic tsunami in Japan could possibly have an upside if it forces the Japanese to think long and hard about alternative energies and the kind of infrastructure—smart grids, rails, etc.—such energies will require.

Ditto for the US, where one big advantage we have over the Chinese is a railway structure second to none. And we should note another advantage: our defense establishment, which in addition to protecting us has produced a few important items of modern civilization, ranging from the Internet to a major role in miniaturization, which has been the basis of all our modern technologies.